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Self Invested Pension Plans (SIPPs) explained
March 19, 2009Article by Ray Withers
Although most people have heard of the term SIPP there has been much confusion about what can or cannot be invested in a Self Invested Pension Plan and who can benefit from such a scheme.
Although SIPPs are marketed to the mass market they are not usually suitable for those with pension funds of under £100,000. However, for those with such a healthy fund SIPPs offer many tax advantages.
In order to entice you to save for retirement the Government offers some very generous tax advantages:
- Income Tax relief at your highest marginal rate i.e. if you are a basic rate tax payer you will get 20% tax relief. If you are a higher rate tax payer you will get tax relief at up to 40%.
- Pensions grow in a tax efficient way too as you do not pay Capital Gains Tax (CGT) within the SIPP so gains roll up tax free, with exception of being unable to claim back tax on dividends.
- In addition, as pensions are based under trust law, the assets held within a pension within the growth stage are free of Inheritance Tax (IHT) in the event of your death.
In return for these tax breaks you are limited in how you can access and invest the funds. You are also limited to the amount you can invest each year and indeed the total pot of money you can hold n the fund. The key points are:
- Maximum investment this year £235,000
- Maximum total fund holding £1.8 million by 2010
- There is no access to the funds until age 55 and then only 25% may be taken as tax free cash and 75% must be used to provide a taxable income for life.
So what can you invest in? The main advantage of SIPPs over standard pensions is that they offer substantially more investment freedom. There was a lot of hype around 2006, but the government backtracked quickly when they realised a lot of residential property and luxury cars were being lined up for pension funds. This media attention has been the cause of much misinformation around SIPPs.
So now we are in a position where you may invest in a more limited range of assets, the main one being property. Although you can invest in commercial property, most people don’t have a fund big enough to buy an office building or a warehouse, even taking into account you are able to borrow up to 50% of the size of your fund.
Hotel rooms however are a different proposition altogether. They are normally more affordable for most investors although the issue here for most SIPP providers is that investors often try to SIPP their own holiday home and pass it off as a hotel room.
Hotel units are usually categorised as SIPP compliant if they adhere to the following statements:
- The investment is demonstrably a hotel room.
- The investor has no personal usage of their room or any other room. (Unless they pay normal market rates).
- The investor gains no benefit other than from room rental i.e. no income share from hotel bar or restaurant.
- The investment is in no way a residential property.
- The unit does not have a kitchen.
As simple as this sounds it can be a lengthy and soul destroying process to get a SIPP provider to approve a project. It is therefore always advisable to take advice from a financial adviser that is used to dealing with such investments.
Other approved assets include:
- Direct investment into stocks and shares
- Direct investment into authorised UK Unit Trusts, Investment Trusts and many OEICs
- Direct investment into futures and options on a recognised futures exchange
- Insurance company funds
- Deposit accounts in any currency, held with a UK based deposit taker
- Traded endowment policies provided they are sold by an authorised person
- Overseas stocks and shares quoted on a recognised Stock Exchange
- Commercial Property (including land, offices, shops & industrial units)
- Ground rents (related to commercial property only).
- Unlisted Shares (subject to certain conditions)
Property Frontiers currently has a number of projects which are available to purchase through a SIPP. This means you may be able to consider such an investment with funds you had previously not considered.